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The Welfare State Exposed

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After the Welfare State, edited by Tom G. Palmer (Jameson Books, 2012), 180 pages

Most Americans (indeed, most people in every advanced nation) walk around in a fog of myths and misconceptions concerning the subject of this book — the welfare state. They believe that in the absence of governmental welfare programs, there would be little or no support for the needy. They believe that welfare mainly helps those who are unable to help themselves. Because so many people hold those ideas, politicians find it easy to manipulate them into supporting an array of programs that look “compassionate” on the surface but are in fact deeply harmful to the nation’s social and economic fabric.

With Tom Palmer’s latest book, the Atlas Economic Research Foundation continues its project of enlightening people as to the benefits of true liberalism, this time by demolishing the mythology surrounding the welfare state. It consists of three essays by Palmer and six by other writers. Any reader who approaches the book with an open mind cannot avoid an awakening to the prodigious damage that governmental welfare programs have done.

In his opening essay, Palmer introduces readers to a key understanding: Governmental welfare is an instance of the tragedy of the commons. Once the government’s treasury is opened to groups seeking benefits — and there is no way to limit access just to supposedly needy groups — the result is certain to be the same as opening up pasture land to every owner of farm animals. The pasture (“the commons”) will be ruined through overuse.

Using a more current commons problem, Palmer explains, “In modern welfare states, everyone has an incentive to act like irresponsible fishermen who fish out the lake, except that the resource we’re plundering is each other.” I think his analogy is a brilliant stroke, as it unites a widespread understanding among Americans about a serious environmental problem with the libertarian case against the welfare state. If someone can grasp the harm that’s done when pastures are overgrazed or fish stocks are depleted, he should also be able to see the harm from the political free-for-all that occurs when people start to think of the government as a source of wealth.

Palmer concludes by linking our mounting and evidently irreversible debt accumulation to the welfare state, because the flood of red ink is driven mostly by the promises politicians made in the past to give people “free” money and in-kind benefits. Massive borrowing to pay for welfare benefits (along with other government boondoggles) is putting a heavy mortgage on future generations.

The next two essays concern nations that have been much in the news recently for their economic woes — Italy and Greece.

The decline and fall of the Italian miracle

Piercamillo Falasca’s “How the Welfare State Sank the Italian Dream” recounts the political and economic history of Italy following World War II. Americans who read about the condition of Italy today, with huge government debts that put it on the brink of default, probably have no idea that from the late 1940s to the 1960s, Italy was a model of fiscal prudence. In those decades, Italy enjoyed rapid economic growth, because the government intervened very little in the economy. Italians knew that if they wanted to prosper, they had to work and create wealth on their own. From 1946 to 1962, Falasca observes, the average annual rate of economic growth was 7.7 percent — a fabulous performance.

Especially important in this miracolo economico was the classical-liberal Italian economist Luigi Einaudi. During that period, government policy was rooted in his beliefs in sound money, free trade, and government nonintervention in the market process.

With that economic success, however, there was also the temptation to divert wealth produced in the private sector to the government for redistribution. In the 1960s the seeds of Italy’s current economic malaise were sown as politicians, eager to win support through vicarious generosity, enacted increasingly costly welfare measures and “prolabor” regulations. Among those measures was a national health-care system financed almost entirely through taxation.

The result was a dramatic change in the country. Economic growth began to decline and now hovers around 2 percent annually. Unemployment has risen steeply, and the government’s budget is a sea of red ink. Bad as the economic effects of welfarism have been, Falasca writes, “the deepest consequences of Italy’s welfare state … [are] not economic but cultural. The culture of welfare addiction is what has made change so difficult.” That is a crucial point. Once people habituated to government handouts, it became nearly impossible to reverse course to the old days of self-reliance.

Beware of governments bearing gifts

Aristides Hatzis cites his native Greece as a “precautionary tale” that warns us to avoid the welfare state. Much as was the case in neighboring Italy, after World War II Greece enjoyed steady economic growth despite considerable political instability and rule by a military junta (1967–1974). In 1981, however, the nation elected the socialist party headed by Andreas Papandreou, who envisioned a radically transformed nation — a welfare state with a government-planned economy and cradle-to-grave welfare benefits. The majority liked the promises of an easier life, but the results have proven to be “a deadly mix of a bloated, inefficient welfare state with stifling intervention and overregulation of the private sector,” Hatzis writes.

Government spending rose steadily, largely paid for by foreign borrowing. Both the overtly socialist party (known as PASOK) and the ostensibly conservative party bought into the public demand for generous government benefits. The Greeks enjoyed “party time” for a couple of decades, based on the false prosperity of borrowed money. That lasted until lenders began to comprehend that the Greeks were not producing nearly enough wealth to pay back their government’s enormous and growing debts. When the money ran out and the promised benefits couldn’t be paid, the result was deadly rioting in the streets.

Especially enlightening is Hatzis’s explanation that health care in Greece is very expensive, even though the nation has adopted a government-run system under which care is nominally free. So how can it be expensive? Because medical services are free, there are long waiting lists. To obtain care, people have to resort to bribery. Americans should learn from the Greeks and their unhappy experience.

Where does the welfare state have its roots? Palmer explains in his next essay that they are found in Chancellor Otto von Bismarck’s Germany. Bismarck, who wanted to expand and solidify the power of the German state, fought with German classical liberals who wanted peace, free trade, and liberty for the people. Bismarck understood that the liberal vision blocked his goal of a mighty, dominating nation. To make the mass of the population feel dependent on the government (and therefore supportive of it), he pushed through social-insurance measures covering accidents, disability, and old age.

Bismarck got his powerful Germany, and the masses did indeed support it. If he had failed and Germany had instead remained a collection of small, liberal, peaceful states, the world might have been spared the horrors of the two world wars, Nazi genocide, and Communism.

Palmer connects Bismarck’s scheme for using welfare to control the German people with modern welfare in America:

The welfare state is not merely a collection of discrete and unconnected income transfer programs; it is a coherent political strategy, entailing harmful restrictions on the ability of the poor to improve their lot (to protect privileged groups from having to compete with them), coupled with income subsidies to partially compensate the poor for those grievous harms. The very politicians who portray themselves as friends of the poor when they distribute food subsidies to them, are the very same politicians who vote to keep food prices high by mandating floor prices.

Thus we see that welfare is not really aimed at helping poor people. It is aimed at making them compliant, thoughtless supporters of the politicians who claim to be their saviors. Palmer concludes that the welfare state “is a mixture of wishful thinking and outright lies.” Couldn’t it be replaced with better, voluntary institutions?

Mutual aid

The next two essays answer that question in the affirmative. In “The Evolution of Mutual Aid,” David Green explores the history of voluntary (or “friendly”) societies in England. Those societies arose without any coercion as individuals combined their resources to improve security for all members. They provided medical care, death and disability benefits, and losses due to shipwrecks. People could join or leave the societies as they chose. Government played no role in them, leaving the members free to search for the optimal rules and procedures. Before the passage of the government’s National Insurance Act in 1911, a large and growing percentage of the British population was protected by a “safety net” constructed entirely from the voluntary efforts of those societies.

Green’s essay is followed by history professor David Beito’s, which focuses on the American experience with similar mutual-aid societies. “Only churches rivaled fraternal societies as providers of social welfare before the advent of the welfare state,” Beito writes. “In 1920, about eighteen million Americans belonged to fraternal societies, nearly thirty percent of all adults over the age of 20.” Among other services, those societies made medical care readily available to their members. Long before politicians conceived of “single-payer” health care (that is, a government monopoly) millions of poor people were able to get care by joining one of the many societies.

In fact, there were so many doctors with contracts to provide services for members that state medical associations began attacking the supposed evil of “lodge practice” because they saw it as a threat to the fee-for-service model that traditional practitioners favored. (Unfortunately, Beito reports, those attacks were successful, another of the many instances where powerful interest groups have used the power of government to stifle competition.)

A crucial point about the operation of the societies is that they had to guard against moral hazard. With limited resources and no power to tax, they had to find ways to keep members from claiming benefits when they were not warranted. Beito argues that they were quite successful in doing so and were far more effective than government officials at detecting malingering.

Fraternal societies were also important in helping immigrants. Their success in that, however, actually irritated “progressives” like Teddy Roosevelt, Beito writes. Roosevelt argued that the societies were doing — voluntarily — what he thought “the people” should be doing. In other words, he disliked the fact that private action was working where he thought the coercive hand of the state should operate. (Bismarck and Teddy had a lot in common.)

Concluding, Beito maintains that the fraternal societies helped to equip their members with traits of independence, self-reliance, and foresight, whereas welfare programs undermined those virtues.

Beyond any doubt, the poor were better off with voluntary institutions than with government welfare programs. The big question is how to return to voluntarism.

American disasters

In his essay, “The Welfare State as a Pyramid Scheme,” Michael Tanner shows that the promised benefits of welfare programs are far beyond what the state can possibly pay. They are pyramid schemes in that the early participants get a handsome return on their money at the expense of later participants. Eventually the pyramid must collapse, because no wealth is created to pay for all the promises. Both in Europe and the United States, the welfare benefits coming due in approaching decades will overwhelm the ability of governments to pay them. If that truth becomes widely understood, it may be possible to shift the responsibility for welfare from the state to civil society.

An important, if somewhat tangential, contribution is Johan Norberg’s essay in which he shows that the housing bubble was due to government policies, not excesses of greed in deregulated markets, as many statist apologists have said. The bubble, which inflicted so much damage on individuals and institutions when it burst, was an offshoot of the welfare-state mentality that government must intervene to help people get the things supposedly necessary for a good life. Norberg’s point is that we should leave housing to the free market, just as we should leave  food, medical care, and other essentials to it.

Palmer’s final essay, “Poverty, Morality, and Liberty,” brings the book to a grand close, like the coda to a great symphony. Welfare-state advocates, he shows, have long taken advantage of popular misconceptions to persuade people that we must abandon laissez faire and embrace the authoritarian welfare state out of compassion for the poor. They have created a false picture of idyllic life prior to the advent of capitalism and an equally false picture of misery for ordinary people caused by capitalism. The truth is that capitalism, combined with voluntary associations and charitable organizations, led to tremendous increases in standards of living for everyone. And on the other hand, government interference with capitalism and the plethora of welfare programs have slowed economic progress and created a destructive culture of dependency that gravely harms the poor.

Do you want to help fight poverty? Then I suggest getting many copies of After the Welfare State (Atlas sells copies inexpensively, or you can just download the book for free) and giving them to every thinking person you know.

This article originally appeared in the October 2013 edition of Future of Freedom.

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    George C. Leef is the research director of the John W. Pope Center for Higher Education Policy in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.